The party was being shown on a giant screen across the Tigris
Iraqis have held a giant party in a Baghdad park as US troops approach their deadline for withdrawing from cities and towns to their bases.
Thousands flocked to the capital's Zawra Park to be entertained by musicians and poets, as police patrol cars were festooned with flowers.
US-led combat operations in Iraq are due to end by September 2010, with all troops gone by the end of 2011.
Iraq has declared Tuesday National Sovereignty Day, a public holiday.
The country's security forces are set to take over the policing of cities and towns.
The BBC's defence and security correspondent, Rob Watson, says that while the pull-back is significant, the actual withdrawal of US combat troops next year will pose a greater challenge.
Some 131,000 US troops remain in Iraq, including 12 combat brigades, and the total is not expected to drop below 128,000 until after the Iraqi national election next January.
"Since 2003 [the year of the US-led invasion], I have never been to a party," Ahmed Ali, 20, told AFP news agency as the party got under way in Zawra.
A US general handed over the symbolic key to the defence ministry
"But today I am coming to hear the singers I love."
Popular Iraqi singers including Salah Hassan, Kassem Sultan and Abed Falek, who all live abroad, had travelled to Baghdad for the occasion, the agency said.
Revellers had to undergo three security checks to enter the park but no-one seemed to complain amid a jubilant atmosphere, where an onstage banner declared that Baghdad's sovereignty and independence had been recovered.
Even policemen joined in the fun, dancing with the party-goers, AFP reported.
"Today is the day that we got back our country," said Salim Mohammed, from the sprawling Shia district of Sadr City.
Despite the festive mood, Iraqi police and soldiers were manning checkpoints, inspecting identity cards and checking vehicles for weapons.
Interior ministry spokesman Maj Gen Abdul Karim Khalaf said he had orders to deploy his forces "100% on the ground until further notice".
The former defence ministry building in Baghdad, which was taken over after the 2003 US-led invasion, was handed back to the Iraqi government on Monday.
Gen Abboud Qambar, commander of Baghdad Operation Command, received a symbolic key from US Gen Daniel Bolger, commander of US forces in Baghdad.
"This marks the end of the rule of the multi-national force," the Iraqi commander said.
American commanders are describing the withdrawal to base as an important milestone, our correspondent says.
Yet it is not a dramatic break because US troops will still be embedded with Iraq's security forces and many American soldiers will remain a short drive away on the cities' outskirts.
The pull-back is not without risks, our correspondent adds, and both the Americans and the Iraqis are expecting al-Qaeda and other groups to attempt to re-ignite sectarian unrest.
While no-one believes there will be a return to the levels of violence seen a few years ago, the bigger challenge will come next summer when American combat troops are due to be withdrawn, rather than merely redeployed, our correspondent says.
He says for that to go well is in the hands of Iraq's political leaders and their ability to tackle the country's many outstanding problems and tensions.